Don’t delay, waiting for annuity rates to improve

There are two main factors used to determine general annuity rates – life expectancy and interest rates.

Life expectancy. The longer an insurance company thinks someone of your age is going to live, the smaller the pension payments will be, as you should receive more of them (in theory). This is why many insurers will now offer a higher pension if you are in ill health or smoke, because the reverse applies.

Life expectancy is increasing, and this trend seems likely to continue with advances in medicine and health care. It is, therefore, unlikely that annuity rates will increase as a result of mortality (on the contrary).

Interest rates. The other main factor is interest rates (in particular gilt yields). The higher the income the insurance company can generate from its gilt investments, the higher the income it can provide you with. There is a serious risk involved in deferring annuity purchase in the hope that gilt yields (and therefore annuity rates) will improve significantly in the future. They might do, but this is a gamble.

If you delayed buying an annuity you must also remember that you are foregoing your annuity income now, and when you eventually take action you need to be confident that rates will be so much higher that you can make up for the income you didn't receive while you delayed.

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